As the population ages, a power of attorney is becoming a more critical element to any client's financial plan. But this document can be riddled with pitfalls.

One growing issue is abuse. For example, allegations of abuse have ensnarled the estate of the late philanthropist Brooke Astor. Her son was recently indicted in New York for allegedly abusing his power of attorney. His attorney has denied the charges.

Fraud and forgery of durable power-of-attorney documents have also become significantly easier as blank forms become widely available online. But numerous other issues pose a threat for your clients as well.

Among these:
People are outliving the person they designated as power of attorney.
State laws concerning powers of attorney are getting families embroiled in legal disputes.
Financial institutions are setting their own requirements for invoking a power of attorney.
Fiduciaries are getting sued if they incorrectly release funds on the basis of power-of-attorney documents.

Financial advisors are not immune from the last item, warns West Palm Beach, Fla., probate lawyer John Pankauski. "The law doesn't discriminate. Fiduciaries are held to reasonable or higher standards of reviewing a durable power of attorney, analyzing the act which is being requested, and determining whether the power holder-the agent-has authority to do what he or she is requesting."

Often, Pankauski notes, financial advisors have language in account-opening documents that provides limited power of attorney for certain things, such as trading securities. However, in Florida, as well as in many states, Pankauski warns, you need witnesses on these documents. "If you don't follow the statute precisely, it's invalid."

Another problem occurs in Florida and other states with accounts that are slated to pass automatically to beneficiaries when the account holder dies. These include joint accounts, deposit accounts "in trust for" certain beneficiaries and "payable on death" accounts. Those holding a power of attorney may wrongly assume the document gives them power to change these automatic beneficiary designations. Not so-unless the power-of-attorney document contains specific language that allows for it.

The result: Not only are those holding a power of attorney getting sued for exceeding their authority, Pankauski says, but so are financial institutions, which incorrectly release account-holder funds.

Similar power-of-attorney restrictions on automatic beneficiary designations are believed to exist in California, Kansas, Missouri, Washington and New Mexico and perhaps other states, according to The National Conference of Commissioners on Uniform State Laws in Chicago. In Florida, Pankauski says, those who successfully sue may be entitled to damages, costs and attorney fees. However, rules for the reimbursement of expenses may vary in other states.

Say you are provided with a power-of-attorney document and asked to transfer funds for a client. Easy enough, until you learn that your product provider-the investment company or brokerage-declines because it has its own forms and procedures. The power-of-attorney designee is bound to get mad-particularly if the principal is already incapacitated. Yet you certainly don't want to sue your product provider!

Best to avoid this tricky situation by learning in advance exactly what documents your product provider needs to act on a power of attorney, Pankauski says. Linda Whitton, professor at Valparaiso University School of Law in Indiana, says the greatest problems with power-of-attorney documents typically come once a principal is incapacitated. The agent presents the document to conduct a transaction, only to be told that the power of attorney must be on the institution's own form. The problem is, it's too late to get the principal to sign the form. Families often find the time and expense involved in getting the power of attorney accepted more costly than just getting a guardianship.

Whitton was involved in the 2006 Uniform Power of Attorney Act, which several state legislatures are expected to introduce this year to help avoid these situations. Already adopted in New Mexico, the new rule is expected to make power-of-attorney documents more portable nationwide. Under the rule, only a power-of-attorney document plus a picture ID is necessary to prove who the person holding the power is, according to John P. Burton, chair of the NCCUSL committee that drafted the act.

The agent may be required to sign a document certifying that he or she is the agent. A statement saying that the principal who gave the power of attorney is still alive may also be required. That's because a power-of-attorney document becomes invalid once the principal dies. But if the rules are correctly followed, fiduciaries may gain some protection from lawsuits.

In the meantime, what should you do if your client needs to draw up a power of attorney?
Attorneys unanimously agree that it is most important for your client to choose someone 100% trustworthy. The person should live nearby, and have the time and experience to handle the duties. The agent, or power-of-attorney appointee, is generally considered a fiduciary and can be sued if something goes wrong.

Clients might also consider giving power to remove the trustee to someone who has no authority over the assets-say, a trusted certified public accountant or lawyer. Also, the client should name successors.

Or the client might have the court appoint a disinterested "special master" or magistrate capable of appointing a new trustee, Pankauski suggests.
Some attorneys say an agent appointed with power of attorney might be required to provide monthly accounting statements to a lawyer or accountant. It may be wise to name co-agents, which would require two signatures.

However, rather than subject an agent to this hassle, it might be better in the power of attorney document to very carefully limit the authority of the agent holding the power of attorney, Pankauski advises.

For example, a document might say the power of attorney agent cannot "alter or amend" accounts that your client owns with anyone else. Or he or she might specifically state that the agent can't "alter or amend" any beneficiary designations on life insurance contracts or retirement accounts. Such accounts are particularly ripe areas for abuse.

Does your client want the power of attorney agent to be able to make gifts to people if he or she is incapacitated? Sometimes this may be necessary for tax planning. Perhaps distributions need to be made to trusts or certain insurance premiums need to be paid. Does a power holder want to be able to make gifts to himself or herself? The document might spell out these powers and the specific amounts, allowing for inflation.

Whitton notes that the new uniform power of attorney act offers a list of so-called "hot powers." Financial advisors might use it as a checklist with clients to make sure important issues are addressed (see sidebar).

She cautions proactive advisors, who may investigate what documentation banks and other financial services companies require from clients to invoke a power-of-attorney document. Clients need to be careful that newly signed documents don't erode powers in a lawyer-drafted power of attorney. Also, if a client is drafting a general power-of-attorney document, he or she needs to reveal the existence of any other power-of-attorney documents. What if your client inadvertently gives two different people authority over the same assets?

If a client of yours is asked to be named as a power-of-attorney agent, that client might consider seeking a type of "exoneration provision" from the person drafting it, Whitton says. It could benefit the client to have some protection if an innocent mistake is made-unless the act occurred in bad faith or with intent.